31, 2019 02:29PM / FBNQuest Research
Material cuts to our 2019-21E EPS forecasts
Following Dangote Cement (DangCem’s) Q2 2019 results which surprised negatively, we have cut our 2019-21E EPS forecasts by c.16% on average. Despite the cuts to our EPS forecasts, our new price target of N226.5 is only 8% lower because we have rolled forward our valuation to 2020E. The downward revisions to our earnings forecasts are reflective of a weaker outlook for volume growth in Nigeria and greater price discounting arising from increased competitive intensity and output from new capacity (BUA).
Although management is optimistic that its ongoing sales promotion will stimulate demand and help it regain market share, we have taken a more conservative stance on unit volume growth. Given that the Q3 quarter falls in the off-peak rainy season, we expect price discounts across board to partially offset the price increase of N150 / bag that was announced in April 2019.
Consequently, we have cut our 2019E unit volume forecasts for Nigeria and the Group by around 8% and 10% respectively. Beyond 2019E, our unit volume forecasts are down by an average of 7% and 4% for Nigeria and the Group respectively. As such, the reduction to our volume forecasts underpin the 7% and 2% cuts to our 2019E and 2020E sales forecasts respectively.
Following the downward revisions to our sales forecasts, we see the firm’s 2019E and 2020E EBITDA margin declining to 47.1% and 45.2% from 47.6% and 46.5% previously. Having shed -10.4% ytd vs -10.0% ASI, DangCem shares still provide a significant upside of 33.2% from current levels. As such, we retain our Outperform rating on the shares.
PBT flat y/y in Q2 2019 after double-digit y/y decline in Q1 2019
Although DangCem’s Q2 sales declined by -5% y/y to N227.6bn, PBT came in flat y/y thanks to a -72% y/y reduction in net interest expense. In contrast to the trend on the PBT line, PAT grew by 25% y/y, driven by a lower effective tax rate of 33.6% (vs. 46.8% Q2 2018). The lower tax rate is reflective of the pioneer tax status (for Ibese lines 3 and 4 and Obajana line 4) that the company received in Q4 2018.
Relative to our forecasts, sales and PBT both missed by around 7%. However, PAT missed by a wider margin of 18% because we had modelled a lower effective tax rate of 15% vs. the 22.9% reported by the company. DangCem’s Q1 2019 earnings also came in below expectations. PBT and PAT declined by 27% y/y and 25% y/y respectively due to a -121bp y/y contraction in gross margin to 58.6% and a 28% y/y rise in opex. Sales were flat y/y. Relative to our forecast, sales were broadly in line. However, PBT and PAT missed by -12% and -21% respectively.
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